What the Heck Just Happened to Gold and Precious Metals?

By Brendan Conway

Mr. Market rediscovered gold and other precious metals on Thursday, resulting in the metal’s biggest one-day rise in more than half a year. It was the 14th biggest single-day move in the price of the most popular gold ETF and a day that one trader termed ”frantic” for repositioning and short covering.

Okay, then. Why? Strategists are pointing to the Federal Reserve and its decision this week to stand pat on monetary policy. Not convinced? Neither are these strategists very convinced — except when a few of them are declaring that the market is growing increasingly skeptical of the Fed. If skepticism’s the driver, then the turn toward anti-Fed assets like gold would make more sense.

Commerzbank’s commodity strategists track the buying activity to the futures market, which is where a number of aggressive fund managers make their moves:

Agence France-Presse/Getty Images

Golden

The price rally was evidently triggered by Wednesday evening’s meeting of the US Federal Reserve, despite it yielding no surprises: as anticipated, the Fed scaled back its monthly bond purchasing programme (QE) by a further $10 billion and adjusted its projections only marginally. Fed Chair Janet Yellen merely reiterated that interest rates will remain low for a considerable period even after QE has come to an end. However, market participants apparently saw this as good reason to buy gold as well as silver on a grand scale. These were not purchases of physical gold, however, but predominantly transactions on the futures market. At over 245,000 and a good 117,000 contracts respectively, gold and silver contracts were traded at well above the average rate yesterday.

The Lindsey Group’s Peter Boockvar writes this morning that he’s watching gold and TIPS as a baromoter of the market’s view of the Fed’s credibility — and he reads the Thursday trading as a note of doubt:

Because of my amazement and surprise that the Fed didn’t alter one bit its comments on inflation in their official statement, barely changed its PCE forecasts and Janet Yellen referred to the recent higher inflation data as ‘noise’, I felt it important to mention yesterday morning that watching gold and inflation break evens were the two key indicators to watch as I believe going forward they will be a valid vote in giving their opinion on the Fed’s credibility with their policy relative to the reality of the data (in addition to the recent consumer price data, the CRB index is a ½ pt from the highest since September ’12) . While it was just one day, gold certainly spoke loud and clear on its thought of the new Fed forecasts with its biggest one day percentage rally since September and inflation break evens went up for a 3rd straight day with the 5 yr implied inflation rate at the highest level since May 2013. Based on this market response from both asset classes, I’m declaring Janet Yellen’s honeymoon as Federal Reserve Chair as officially over. This is not because I expect an imminent revolt in inflation sensitive markets to her inflation forecasts as this is always a process but because yesterday was the 1st time in her tenure that the market came out and blatantly disagreed with her and the committee as I believe they correctly should have. I expect this divergence to continue.

The market is a bit quieter in early Friday trading. SPDR Gold Trust (GLD) and Market Vectors Gold Miners ETF (GDX) are down 0.7% and 1.3%, respectively, ahead of the regular session.

Direxion Daily Gold Miners Bear 3X Shares (DUST) and Direxion Daily Gold Miners Bull 3X Shares (NUGT), the three-times leveraged traders’ ETFs which moved more than 16% apiece on Thursday, are moving in the range of 3% to 4%.

iShares Silver Trust (SLV), which jumped 4.6% on Thursday, is off by 0.4%.

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There are 59 comments

JUNE 20, 2014 8:16 A.M.

M. Andrew Lee wrote:

With her declaration of "noise" Ms. Yellen basically became a lazy economist. These folks get paid to make tough decisions on numbers that are hard to read and understand, move in relatively small orders of magnitude, and rarely give clear signals. Her response was akin to a student in school who chooses not to make an effort when you ask them to solve a complex problem; the proverbial, "umm, I don't know".

JUNE 20, 2014 8:19 A.M.

matt wrote:

Has everything to do with the hundreds of thousands of missing tons of aluminum and copper in China and the carry trades that are unwinding people. Long story short

JUNE 20, 2014 8:24 A.M.

Fred wrote:

I love it, all you talking head analysis - are after the fact people- trying to pick a reason for what happened. Do some research rather than be a arm chair quarterback after the play.

JUNE 20, 2014 8:25 A.M.

Anonymous wrote:

dump...it...we'll pick it up later at half price....your new boat is waiting for you...

JUNE 20, 2014 8:30 A.M.

MP wrote:

Doubt it has jack to do with the Fed. People are reaching for straws.

JUNE 20, 2014 8:36 A.M.

Alan wrote:

Maybe people realized you can't believe anything this administration or the government tells these days. The Fed, though not a government institution, still plays the political game. Who can you trust?

JUNE 20, 2014 8:36 A.M.

buck wrote:

Abolish the Federal Reserve AND the IRS.
Art 1, Sect. 10 of the Us Const. has not been repealed.

JUNE 20, 2014 8:40 A.M.

Neighbor Dave wrote:

Everything is fine... nothing to see here...move along. (sarcasm)

JUNE 20, 2014 8:44 A.M.

CFD unwind wrote:

As another commenter added, it is not only an inflation story, but one involving the unraveling of a commodity Ponzi scheme in China.

JUNE 20, 2014 8:52 A.M.

mark wrote:

inflation is here and the fed is clueless

JUNE 20, 2014 8:54 A.M.

Lisebelle wrote:

Wonder if this has anything to do with the US going back into Iraq.

JUNE 20, 2014 9:05 A.M.

Cledaisy wrote:

Greed, Fear, Herd mentality. I'm also getting in on Dandelion seeds, word from the secretive flower industry in Holland, there's going to be a shortage of them next year. Start loading up Now.

JUNE 20, 2014 9:16 A.M.

bob wrote:

Metals markets are highly manipulated. How Citi avoided charges in their last court case is surprising.

JUNE 20, 2014 9:19 A.M.

rog wrote:

I have 10,000 lbs. of copper do I sell or hold....decisions, decisions.

JUNE 20, 2014 9:31 A.M.

MassDebater wrote:

Mr. Market rediscovered gold?? LMAO....Brendan Conway you are a pinhead! It's my contention that it is you and not the market that rediscovered it.

JUNE 20, 2014 9:35 A.M.

Common-sense wrote:

Idiotic article.

JUNE 20, 2014 9:56 A.M.

watchtheborders wrote:

The FED is powerless to do much at this time, except hope they can wean the economy off QE counterfeit money. The small decrease is a test, nothing more. They will macro manage it and micro manage it for indicators they have little to no control over. There's a reason why Volker left after two years. As Obama said, "if I can't fix it in two years I shouldn't be reelected". I'd change that articulation to "i won't run for a second term if I don't fix it in two years" !

Watch the inflationary trend in food staples, and additional taxes on gasoline and other non commodities, essential to your daily lives. Those taxes are a cover for recovering QE lost valuations IMHO, but then I'm just a financial MBA with decades of experience. The FED knows best yes?

LMFAO

JUNE 20, 2014 10:00 A.M.

Hog Wild wrote:

The reason gold moved is unimportant. That it moved $40 because a couple big shorts covered their positions is all you need to know. There are many more shorts out there. This fairly effectively puts a floor under the gold price.

JUNE 20, 2014 10:07 A.M.

Michael Graham wrote:

Well, what's this?

A mainstream financial publication admitting that higher gold prices reflect poorly on the Fed... which of course would mean lower prices are "required" to be "managed" in order to keep the Ponzi scheme going...

But Mr. Bernanke testified under oath that he paid no attention to gold price and had no idea why anyone would want to own any... he wouldn't tell little white lies to congress now, would he?

JUNE 20, 2014 10:11 A.M.

dubujul wrote:

This has been only speculation. Nothing else. and people fell for it.

JUNE 20, 2014 10:21 A.M.

Wild Willy wrote:

Gold will be super again when the world market realizes that the US Dollar is virtually worthless due to our recent massive spending by the government and the debt we owe to China.

JUNE 20, 2014 10:29 A.M.

StockBet.com wrote:

Every commodity deserves a turn at being a bubble.

JUNE 20, 2014 10:33 A.M.

Snailmailtrucker wrote:

I got $10,000 that says 95% of the gold that is supposed to be in Ft. Knox is missing !

JUNE 20, 2014 10:38 A.M.

socrates wrote:

The real financial battle that the Fed have been engaged since 2009 crash is Deflation and Still Is their greatest fear, contrary to general public comments the Fed pay very very close attention to Inflation and
sings, noises of growing inflation is welcomed. The Fed insist, because such is their strategy that when there
will be evidence of established and growing inflation they have the "tools" to control it therefore the added
liquidity of $ 4.5 Trillions will Not create a runaway inflation. IMO it is easier to say it than to do it!

JUNE 20, 2014 10:47 A.M.

lon wrote:

If the dollar is going to be worthless, why does companies sell gold for the dollars?

JUNE 20, 2014 11:14 A.M.

john baker wrote:

this article is guess work, written by a writer who doesn't know what's going on...it was not a speculative move, but an industry move....made by the strong hands who needed gold to fulfill their business obligations...it was a market imbalance of strong handed buyers looking for gold but no strong handed sellers...the gold was positioned to by those who provide it to the gold industry...

JUNE 20, 2014 11:39 A.M.

Matt wrote:

Look at the Billion Price Project from MIT. The inflation number is not noise.

JUNE 20, 2014 11:53 A.M.

oatka wrote:

"What the Heck Just Happened to Gold and Precious Metals?"

Maybe some naive people just discovered that the light at the end of the tunnel is a locomotive - or an 800-lb gorilla with a flashlight.

JUNE 20, 2014 11:55 A.M.

Anonymous wrote:

More buyers than sellers! The technical indicators are turning bullish. The technician 28.

JUNE 20, 2014 12:00 P.M.

The technician 28 wrote:

More buyers than sellers! The technical indicators are turning bullish!!

JUNE 20, 2014 12:07 P.M.

Questioner wrote:

Perhaps it had more to do with other news... like the story of Russia trying to establish a group of countries that trade outside of the US Petro-Dollar and SWIFT banking. Just a thought.

JUNE 20, 2014 12:24 P.M.

Anonymous wrote:

Just like the housing market.....that big bubble will eventually break

JUNE 20, 2014 12:29 P.M.

William Bednarz wrote:

You asked what happened ?? The FED cut-back on buying bonds and is stopping its manipulation of our currency. Gold and Silver will return to its place in our economy...

JUNE 20, 2014 1:09 P.M.

Mike wrote:

Just look to the Koch bros and you'll see they drive everything to their favor!!

JUNE 20, 2014 1:17 P.M.

Phil wrote:

Brendan..You really are cluless aren't you. It's hard to believe you make a living analyzing markets and don't realize what's happening..

Barrons... LOL... one of the biggest gold bashing MSM puppet organizations, only trumped by Bloomberg maybe... they are "so surprised"... because they've been telling the middle class to hate gold and trust the government.

JUNE 20, 2014 1:46 P.M.

Larry Camp wrote:

How are all of you I cautioned to sell gold in December, 2013 feeling today. Pigs get fat, Hogs get slaughtered. Sell, means sell!!!

JUNE 20, 2014 1:50 P.M.

gaz wrote:

Russia declared its non dollar denominated trade policy with all of its natural gas customers. The hegemony of the dollar is crumbling in foreign markets due to unsound central bank policy to raid the cookie jar again and again.

JUNE 20, 2014 1:52 P.M.

The Analyst wrote:

In a December 2013 post, I predicting the rise of gold in early 2014. Then In March 2014, via another post, I predicted the last down wave of gold to be followed by a resumption of a strong and sustained bull market in gold. At the same time, I also advised rotation from general equity to gold shares to protect the gain. Well, you know the rest of the story !!!

The bull market in gold shares, after a major correction in 2013, has resumed. We are in the early stage of this bull run as far as gold is concerned. Consider the following:

- Inflation is ticking up (by the way, I also predicted that inflation will tick up in June - July time frame). The inflation game is such that it does not go in a linear fashion and it will accelerate with time. Last two month, we are getting spikes in producer's index as well as core inflation rate. Look for it to increase in fits and starts and then it will accelerate in earnest. It will not be hindered by Fed rate increase as any increase will be of a gradual manner and any gradual rate increase will actually add to the inflation index as companies pass the capital cost increase to the consumer. Labor and materials are tightening and further add fuel the fire.

- Government policy is such that it hopes to inflate out the debt situation so the pay back will be in cheaper dollars. So inflation is a good thing for the policy makers (those that control the levers of power)

- Geopolitical tensions are on the rise. Ukraine just killed 300 separatists yesterday and that is a triple digit casualty. There is no telling what Russia might pull some surprised (but anticipated) military action. Iraq is further sinking into the abyss with
no end in sight and threatening world energy supply. Iran's nuclear issue negotiation has a dead line in July and things are at standstill. Any single issue described above, in and by itself will have major impact on gold prices.

- Gold supply is diminishing with minor operators shutting down and major operators like Barrick cutting back on production. There is such a shortage of physical metal that GS recently engineered a deal on what appears to be borrowing central bank vault gold from South American countries for a period of three years.

- Central banks of major and minor countries are all devaluating their currencies competitively hoping to export their unemployment to their neighbors. To say we will have a word wide inflation is an understatement.

- Sentiment on gold share investment is shifting with minor players tip toeing back into the gold shares and the advance sentinels are sniffing the air. If past experience is any guide, the herd is stirring and will the stampede into gold shares will so appear on the scene.

So... what is the right thing to do?

Back up the truck NOW and start loading up on gold shares! You will not have another opportunity like this. Do not get left in the dust. You missed loading up on the dirt cheap stocks in 2009, and you do not want to miss this one!!!

Remember - You hear it here first.

JUNE 20, 2014 4:44 P.M.

biffula wrote:

Is Brendan Conway really this stupid?!? Does he really not know why gold has rallied in the past couple of weeks??? Its because of Iraq you moron.

JUNE 20, 2014 5:48 P.M.

Maloogie wrote:

The Fed may stop interfering in the natural order of bond buying by tapering, but the rest of the world is beating our doors down in the wake of Iraq and Crimea "crisis" and picking up the slack. In the meantime, gold and silver resurge as safe haven for those who understand, the Fed can NEVER raise interest rates, lest it cripple the real estate reflation of the last seven years, which has prices only high enough, to relieve 10 of the 30 % of homeowners under water. That's right, it's taken 7 years to get those homes refinanced, and still the build up of principal and price appreciation won't reach "let's move up" proportions for a minimum of ANOTHER seven to ten years.

So it's print print print, and gold and silver is taking new turns for the better, as we trash our poor paper currencies. See how that works?

JUNE 20, 2014 5:49 P.M.

H. Craig Bradley wrote:

JANET YELLEN'S INCOMPETENCE HAS A PRICE

Gold went up because someone bought it. Plus, up to now daily volume has been quite low. Volume did go up a bit on occasion yesterday, but not that much or for that long. Isolated big buys by a relatively few buyers pushed the price up. Could this be price manipulation? Trading pairs: sell dollars, buy gold. Someone made out good.

The rest of us are trying to figure out why. Is it a renewed concern about inflation at long last? Was it Janet Yellen's incompetence that made some investors nervous? There are just as many speculations in the futures markets as there are pundits trying to explain what they failed to anticipate the day before gold advanced 3.4%. Its down marginally today. ( Commodity Traders taking off Fridays ?). Take your guess.

JUNE 20, 2014 6:40 P.M.

Occams wrote:

lol.....Luckily, most of America is incredible stupid and gullible, or the Central Banks and the US government could NEVER have gotten away with what they've been doing for so long; Fraud, extortion, manipulation, price-fixing....

'Nature abhors a vacuum', so to speak, and at some point, [you] can no longer manipulate what will 'seek it's own level', and given the fact that 'paper gold' (AKA - TOILET PAPER), has a 100 to ONE OVERSELL.....

Well....Guess who gets to cash their toilet paper in first? Joe Citizen - or Goldman/Sachs, criminal banks, and political 'leaders'?

Here's a GREAT article by a former military and CIA security analyst, with leading comment:

" he told the audience that all the major preconditions for revolution – set out in his 1976 graduate thesis – were now present in the United States and Britain".

YOU - don't know what's coming, but the banks and your government do.

JUNE 20, 2014 8:19 P.M.

DRMGATSBY wrote:

The smart money realizes that there is going to be economic "hell-to-pay" after the illegal, incompetent African leaves office.

JUNE 20, 2014 9:24 P.M.

Allan wrote:

What the heck just happened? Maybe some investors just realised gold was underowned and undervalued at these levels.

JUNE 20, 2014 9:34 P.M.

steve wrote:

Real-estate is about to take a dive do to economic realities, and the commodities will be where to put your extra monies. I sold my gold at 1400 4 years ago, time to sell the condo before it's to late.

JUNE 20, 2014 9:51 P.M.

Occams wrote:

Perhaps people are reading stories like this:

"he told the audience that all the major preconditions for revolution – set out in his 1976 graduate thesis – were now present in the United States and Britain" ~ ex-mil and CIA Intelligence Officer.

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As exchange-traded funds and other investing vehicles have ballooned in number, the task of figuring out what works well and what doesn’t has only gotten harder. Barrons.com’s Focus on Funds looks under the hood of ETFs, mutual funds and hedge funds for overlooked values, actionable ideas and the latest pitfalls for fund investors.

Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.